CALERES INC quarterly report, Q2 FY2011

Filing identity and reporting period

The supplied filing is Brown Shoe Company, Inc. (now identified in the request metadata as Caleres Inc.), Form 10-Q for the 13 weeks and 26 weeks ended July 30, 2011. The request metadata says “2010 Q2,” which does not match the filing period. Financial amounts below are in millions of dollars unless noted.

Financial performance and liquidity

Second-quarter sales rose 7.2%, mainly because the acquired American Sporting Goods Corporation (ASG) contributed $46.2 million. First-half sales increased 5.9%; ASG contributed $87.2 million since acquisition. Despite higher revenue, profitability weakened: the gross margin contracted, operating earnings fell sharply, and Brown Shoe reported a net loss in both the quarter and first half. Interest expense was $6.5 million in Q2 and $13.2 million for the first half, up from $4.8 million and $9.3 million, respectively.

First-half operating cash flow was $43.5 million, versus $27.0 million in 2010. Investing cash use was $175.3 million, including $156.6 million for ASG; financing provided $66.3 million. Cash declined $64.0 million during the half to $62.6 million at July 30. Capital spending and capitalized software totaled approximately $21.8 million in the first half. The company forecast full-year purchases of property and equipment and capitalized software of approximately $52–$54 million.

At July 30, total debt was $448.5 million: $250.0 million drawn under the revolving credit agreement and $198.5 million carrying value of 2019 notes. The company reported $270.7 million of additional revolver availability, with $9.3 million of letters of credit outstanding, and was in compliance with its debt covenants. Working capital was $212.9 million; the current ratio was 1.31:1 and debt-to-capital was 53.4%, compared with 1.59:1 and 32.1% at July 31, 2010. Cash was substantially held by foreign subsidiaries.

Material changes and drivers

• Gross margin fell as toning-footwear demand weakened, markdowns and customer allowances increased, and the sales mix shifted toward lower-margin wholesale. ASG inventory fair-value adjustments added $1.5 million to Q2 cost of goods sold and $4.2 million for the first half.
• Management estimated ERP stabilization issues—including increased allowances and chargebacks, lost-sales margin, and incremental costs—reduced pretax earnings by $4.6 million in Q2 and $10.1 million year to date. It expected stabilization efforts to be completed by year-end 2011.
• Famous Footwear’s Q2 same-store sales rose 0.2%, but first-half same-store sales declined 1.9%; management cited weaker toning sales and lower store count. Wholesale sales increased with ASG, but segment margins and operating earnings declined. Specialty Retail recorded operating losses of $3.0 million in Q2 and $6.8 million in the first half.
• The company acquired ASG on February 17 for $156.6 million, including $11.6 million of assumed debt; a further $2.0 million earn-out may be payable if targets are met. The purchase allocation included $61.2 million of goodwill and $46.7 million of intangible assets.
• Brown Shoe issued $200 million of 7.125% senior notes due 2019 and retired its $150 million 8.75% notes due 2012. The refinancing generated a $1.0 million extinguishment loss. The company also repurchased 2.2 million shares for $22.4 million during the first half.

Outlook, risks, and contingencies

For the second half of 2011, management expected Famous Footwear same-store sales to increase at a low-single-digit rate; for full-year 2011, it expected them to be flat. Wholesale sales were expected to be higher year over year including ASG and approximately flat excluding ASG, both for the second half and full year. Management cited uncertainty about the macroeconomic environment, consumer spending, and pricing, and continued focus on ERP stabilization, ASG integration, and reviewing underperforming or strategically misaligned businesses.

In August 2011, the company agreed to sell TBMC, which markets AND 1 footwear, to Galaxy International for $55 million cash. The proposed sale was subject to customary closing conditions and Galaxy obtaining financing; proceeds were intended for debt reduction. The filing identifies risks including consumer demand, competition and fashion trends, ERP and acquisition integration, supply disruption and product costs, inflation, and the buyer’s ability to finance and close the TBMC sale.

Environmental remediation liabilities totaled $9.4 million, including a $7.7 million reserve for the Redfield site and other remediation activity; management cautioned ultimate costs may exceed recorded amounts. Other disclosed exposures include a $1.6 million reserve for outstanding claims relating to an insolvent insurer and approximately $0.7 million of contingent former-store lease commitments. Management said pending ordinary-course litigation was not expected to have a material adverse effect; a judgment in a Colorado site case had no material impact.

Key facts for investors to verify

• Confirm the intended issuer and period: the filing is for Brown Shoe Company, Inc., quarter ended July 30, 2011, not a 2010 quarter.
• Track whether ERP stabilization was completed by year-end and whether the estimated $10.1 million first-half pretax impact persisted or abated.
• Verify the closing and proceeds of the proposed $55 million TBMC sale, including whether buyer financing was secured and debt was repaid.
• Monitor inventory levels, toning-related markdowns, customer allowances, and gross-margin recovery, particularly in wholesale operations.
• Assess debt, revolver availability, covenant headroom, and liquidity given the $448.5 million debt balance and weaker current ratio.
• Review subsequent purchase-accounting adjustments, the potential ASG earn-out, and changes in environmental or other contingency reserves.